Middle path on PCA for banks under way

RBI's board for financial supervision will be looking at the issues today Prem Singh

The finance ministry is comfortable with the idea of the RBI taking 3-4 of the 11 banks out of the prompt corrective action (PCA) framework without significantly diluting the guidelines.

North Block, however, will continue to separately press the RBI for a relaxation of the PCA norms even as the apex bank’s board for financial supervision met in Mumbai on Thursday to find a way out of the vexatious issue.

Top finance ministry officials said the meeting of the financial supervision board was not “really expected to significantly relax PCA norms” but the government does expect the review exercise to result in “some of the 11 PSU banks being released from these extra stringent norms”. Officials said they expected between 3-4 banks to be eventually out of the PCA by the end of this financial year.

Sources said the RBI may look into the possibility of easing some restrictions placed on a few of these weak banks, after studying their financials.

For instance Allahabad Bank, on which lending restrictions have been placed, has reduced its net NPA (non-peforming assets) to 7.96 per cent of its assets in the second quarter of this financial year, while Bank of India has reduced its NPA to 7.6 per cent.

The government has been having a running battle with the RBI over a number of issues, including a demand that it dilute its PCA norms, which are not allowing them to lend freely to sectors such as small businesses that the government feels could help push GDP growth and employment in the pre-election months.

However, despite a very public spat, the RBI on Wednesday seems to have heeded North Block’s plea to ease credit flows in the economy even if it did not reduce its key interest rates.

The monetary policy committee (MPC) of the RBI has agreed to gradually cut the statutory liquidity ratio, the portion of funds which banks are required to park in treasury bills and other instruments. “We remain in talks with each other and naturally thrash out solutions for the economy,” said officials.

Two of the 11 PSU banks under PCA — Dena Bank and Allahabad Bank — face restriction on lending. In all, the stressed banks make up for 30 per cent of deposits and 29 per cent of advances of all the 21 PSU banks. The government is in a hurry to get the norms relaxed to get these banks to lend and prop up faltering growth.